Report 2021-117 Recommendation 8 Responses

Report 2021-117: Electrical System Safety: California's Oversight of the Efforts by Investor‑Owned Utilities to Mitigate the Risk of Wildfires Needs Improvement (Release Date: March 2022)

Recommendation #8 To: Public Utilities Commission

To ensure that it does not authorize cost recovery, and the resulting rate increases, for activities that were part of a utility's previous general rate case, the CPUC should perform audits of the utilities' wildfire mitigation costs before approving recovery of those costs. In addition, the CPUC should implement sufficient safeguards to ensure the appropriateness of the costs passed on to customers

Annual Follow-Up Agency Response From September 2023

This recommendation is considered fully implemented as described in CPUC's 1-Year response dated 3/23/23.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

The policy the CPUC provided directs its staff to track whether audits have been conducted of applications for the recovery of wildfire mitigation costs. The CPUC also provided examples of audits that reviewed utilities' wildfire mitigation costs that found issues with the utilities overstating and failing to substantiate these costs. Although the CPUC has fully implemented this recommendation, it should continue to follow up on audit recommendations directed to the utilities to ensure the appropriateness of the wildfire mitigation costs passed on to customers.

1-Year Agency Response

The CPUC updated its list of open proceedings where Investor-Owned Utilities (IOUs) have pending requests for wildfire mitigation cost recovery amounts, to add three new proceedings and to indicate that three of the 11 proceedings in the list have now been resolved, see Appendix 1.

The CPUC completed its study (Appendix 1) evaluating the sufficiency of safeguards protecting against duplicative cost recovery, finding that there are adequate safeguards if at least two of the four auditing protection criteria set forth in Appendix 1 are instituted in each cost recovery application: (a) a third party audit performed by the IOU (b) or the Commission, (c) ratepayer advocate participation in the cost recovery proceeding, and/or (d) CPUC Utility Audit Branch audit performed.

If fewer than two of the criteria are met then the Administrative Law Judge (ALJ) assigned to the proceeding may require additional safeguards including, but not limited to independent audit(s) considering the costs and benefits of such requirements pertinent to the specific facts and issues involved with the assigned application.

Considering these findings, the Commission instituted the attached Protocol Number 2023-01 establishing a procedure whereby the Appendix 1 spreadsheet will be semiannually updated and internally distributed to highlight where additional safeguards may be needed.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

The policy the CPUC provided directs its staff to track whether audits have been conducted of applications for the recovery of wildfire mitigation costs. If an audit has not already been performed it directs staff to determine if additional safeguards are warranted. Although this procedure does not explicitly require an audit of all such costs, it demonstrates that CPUC staff are assessing the need for further analysis.

However, we remain concerned about whether the specific risk we identified: whether a utility is requesting cost recovery for activities that were part of its general rate case, is being addressed. We requested copies of the audits performed pursuant to this policy. CPUC directed us to its audit of SCE's application for cost recovery, which describes a number of findings related to the amounts that SCE requested and appears to confirm the risks associated with these applications for cost recovery. What is not clear is whether the scope of audits performed by other parties that CPUC is relying on address this same issue. We have requested copies of those audits and our determination for this recommendation is pending our confirmation that they address the issue described in our recommendation.

6-Month Agency Response

Consistent with our 60-day Agency Response, the CPUC worked together to identify and compile a list of open proceedings where Investor Owned Utilities (IOUs) have pending requests for wildfire mitigation cost recovery amounts.

CPUC has begun the internal study for the eight proceedings identified and will complete the study by March 2023. As part of this review, the eight screening criteria were de-duplicated and consolidated into four key screening criteria. Please see Appendix 1.

CPUC has begun assessing the sufficiency of safeguards for the first proceedings that have completed evidentiary hearings. E.g., in both PG&E's proceedings (A.20-09-019 and A.21-09-008), an independent auditor (Ernst and Young) was engaged by the utility to audit their preliminary request and the utility adjusted their request based on those audit results. Additionally, CPUC hired Crowe to complete a performance audit on the utility's wildfire mitigation costs. Crowe's findings for PG&E cost recovery were thoroughly vetted through the current proceeding process. Also, Cal Advocates conducted an independent analysis of wildfire mitigation balances, and described its methodology for developing recommendations, including extensive sampling of utility documentation. Cal Advocates specifically noted the Crowe audit and how they integrated those findings into their analysis. Currently, the CPUC's Utility Audit Branch is conducting a performance audit of PG&E's balancing accounts that includes reviewing the potential of double cost recovery. Based on our review results, CPUC concludes that sufficient safeguards are in place for the two proceedings noted above, and we will continue our review for the remaining four proceedings.

California State Auditor's Assessment of 6-Month Status: Partially Implemented

The CPUC has created a spreadsheet to track proceedings involving Investor Owned Utilities' (IOUs) requests for wildfire mitigation cost recovery. For these proceedings, the spreadsheet indicates that the CPUC now requires more than two internal and external audits of these costs, or requires the CPUC's Utility Audits, Risk and Compliance Division to perform additional audit work. The CPUC submitted supporting documentation to substantiate that multiple audits had already been performed for two of the eight cost recovery proceedings it is currently tracking. To fully implement the recommendation, the CPUC should formalize these safeguards in its policies and proceedings.

60-Day Agency Response

Energy Division (ED) and Administrative Law Judge Division (ALJ) will work together to identify and compile a list of currently open proceedings and/or Advice Letters where Investor-Owned Utilities (IOUs) have pending requests for wildfire mitigation cost recovery amounts. ED, ALJ, and Legal Division (Legal) will identify new proceedings expected for the remainder of calendar year 2022 and 2023 (to the extent these can be forecasted).

ED, ALJ, and Legal will assess the feasibility of performing cost recovery reviews before approving wildfire mitigation costs. The internal study will be completed by March 2023 and the results will determine whether CPUC will use audits or another tool to systematically oversee cost recovery to prevent utilities from duplicating costs. The study will consider factors including, but not limited to:

- Scope of the proceeding

- Timing of expected Commission decision

- Number and timing of utility wildfire cost recovery requests

- Whether CPUC has control over when these requests occur

- Whether internal CPUC staff could perform the cost recovery reviews and/or contract external auditors

- Financial impact of performing cost recovery reviews for the entire universe of cost recovery cases

- Effect on performing cost recovery reviews prior to cost recovery impacting the ratemaking proceeding schedules

- Effect on performing cost recovery reviews prior to allowing cost recovery may impact IOUs financing of wildfire mitigation activities and IOU's financial health

ED, ALJ, and Legal will jointly assess sufficiency of safeguards to "ensure appropriateness of costs passed on to customers," whether additional safeguards are needed, and whether/how they can be implemented.

California State Auditor's Assessment of 60-Day Status: Pending

CPUC's response indicates that it plans to perform internal studies and assessments to determine whether it believes the actions described in our recommendation are necessary. Thus, it has not yet determined whether it will implement audits or institute additional safeguards to ensure the appropriateness of costs passed on to customers as we recommend. However, we stand by our recommendation that these actions are needed to ensure that it does not authorize cost recovery, and the resulting rate increases, for activities that were part of a utility's previous general rate case.

All Recommendations in 2021-117

Agency responses received are posted verbatim.